City & Corporate: Insurers misjudge risks and rewards

Although it in no way detracts from the horror of the events, the chances of being caught up in a terrorist attack are so tiny as to be impossible to measure. You are many times more likely to fall under a bus than be blown up on one.

The shock of terrorism comes from the fact that it is so unusual, that it is deliberate yet random, and the effect it has on the imagination.

It does not derive from simple casualty numbers. The insurance industry has, therefore, had a chance to gain considerable PR success from the events of the past few weeks.

If it had announced that it would provide free or cheap terrorism cover to people about to go on holiday, it would have scored on the 'helping life get back to normal' measure, as well as providing a service which, rationally or not, the public was clearly in a mood to want. It could have done this at almost no cost or risk to itself because the chances of policyholders being directly affected by a terror attack would be so slight. People were enquiring whether their holiday policies provided that sort of cover. But what did the industry do?

It mainly decided to exclude it.

The companies justify this by saying that because it is impossible to produce a mathematical model for terrorism, it is a risk they cannot re-insure with other companies. Because they cannot lay the risk off, they won't do it in the first place. It sounds rather feeble, but it is just the reaction you get from companies that are producer-led rather than consumer-led - which try to sell what they want, rather than work out what the customer wants.

These same companies will doubtless complain that politicians and the press always pick on them. But a decent public image requires a company to walk the walk over terrorism. The industry's actions in recent weeks suggest that is something many insurers do not understand.

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